Wednesday, October 9, 2013

Case law update

Case law update

Our usual case round-up comes from two different sources. First, there is the Construction Industry Law Letter (CILL), edited by Karen Gidwani and Ted Lowery. CILL is published by Informa Professional. For further information on subscribing to the Construction Industry Law Letter, please contact Kate Clifton by telephone on +44 (0) 20 7017 7974 or by email: kate.clifton@informa.com. Second, there is our long-running monthly bulletin entitled Dispatch. This summarises the recent legal and other relevant developments. If you would like to look at recent editions, please go to www.fenwickelliott.com. If you would like to receive a copy every month, please contact Jeremy Glover. We begin by setting out the most important adjudication cases as taken from Dispatch.

Adjudication - Cases from Dispatch

Adjudication: breach of natural justice
ABB Ltd v Bam Nuttall Ltd

Here, the Claimant successfully argued that an adjudicator’s decision should not be enforced because there had been a material breach of the rules of natural justice. It was common ground that the adjudicator had referred in his decision to a particular clause of the contract which neither party had raised and which the adjudicator did not refer to the parties before issuing his decision. Mr Justice Akenhead said it was perfectly legitimate for an adjudicator to raise new points with the parties and invite comment, argument or even evidence. Having done that, it will generally be perfectly fair and proper for an adjudicator to rely upon that point in reaching his decision. That did not happen here and the issue was an important one. The Judge noted:

“Even if an adjudicator’s breach of the rules of natural justice relates only to a material or actual or potentially important part of the decision, that can be enough to lead to the decision becoming wholly unenforceable essentially because the parties (or at least the losing party) and the Court can have no confidence in the fairness of the decision making process.”

Adjudication: alleged breach of natural justice
Arcadis UK Ltd v May and Baker Ltd (t/a Sanofi)

Arcadis was employed by Sanofi to carry out “remediation” works at Sanofi’s site in Dagenham. The remediations included soil washing, chemical treatment and off-site disposal methods in order to allow future redevelopment and use of the land for industrial purposes. The Contract incorporated the NEC3 Engineering and Construction Contract June 2005, as amended. Disputes arose and there were two adjudications. Sanofi sought to challenge a decision made by the adjudicator in the second. It was particularly concerned that the second adjudicator had been given and considered the decision of the first adjudicator. Sanofi said that the adjudicator “took an erroneously restrictive view of his own jurisdiction, with the result that he decided that he was bound by Adjudication Decision 1 and by the first adjudicator’s reasoning in Adjudication Decision 1” and that Arcadis “brought about the adjudicator’s error by a misguided attempt to seek a tactical advantage or otherwise influence him”.

Mr Justice Akenhead had no hesitation in saying that it was neither improper nor contrary to the rules of natural justice for the decision in the first adjudication to be put before the second adjudicator. Arcadis had succeeded in the first adjudication in relation to very similar issues both in fact and in law. The first adjudicator’s findings on what the contract meant were at the very least germane and could well be thought to be persuasive. The Judge felt that adjudicators must be trusted, generally at least, to be able to reach honest and intelligible views as to the extent to which such earlier decisions are relevant or helpful or not.

Indeed, on the facts, it was clear that the second adjudicator had decided the issues on their own merits and not (only or at all) because he felt that he was bound by the first decision. Further the Judge did not think that it was improper or wrong for Arcadis to put the first decision forward. The Judge thought that it would be a “rare case” in which the adjudicator’s conduct could be challenged in later enforcement proceedings because they looked at or considered any material put forward by either party.

It was also suggested that the adjudicator “went off on a frolic of his own” by “splitting the difference” on the quantum between an adjusted Arcadis forecast figure and the Project Manager’s adjusted forecast figure. Arcadis argued that the proper approach to quantification (subject to liability) was, contractually, to be based on what it did (or what should or could reasonably have been) forecast, whilst Sanofi argued that the value needed to be determined by reference to the work actually done and the actual cost. Both arguments were respectable and it was clear that the adjudicator formed the view that the forecast basis, that is the basis advanced by Arcadis, was the right one. Remember that it was not the role of the court to consider whether the adjudicator was right to do this. Having therefore decided that the forecast approach was right, the adjudicator looked at the possible forecast figures and, ultimately, he was drawn to Arcadis’ figure and to the Project Manager’s figure. Whilst the Judge described the act of “splitting the difference” as Solomon-like in its simplicity, the adjudicator was effectively choosing between two figures, both of which had an evidential basis. Crucially, he did not come up with some basis of assessment upon which the parties had not had an opportunity to comment.

Payment of an adjudicator’s fees
PC Harrington Contractors Ltd v Systech International Ltd

At first instance, Mr Justice Akenhead had decided that an adjudicator appointed pursuant to the Scheme was entitled to be paid when his decision had been ruled to be unenforceable because of a failure to comply with the rules of natural justice. The Judge noted that, as required by the Scheme, the adjudicator had carried out a number of activities, including producing a decision. Further there were policy reasons in favour of the adjudicator. The Judge said:

“One should therefore be somewhat slower to infer that what parties and adjudicators intended in their unexceptionably worded contracts was something which excluded payment in circumstances in which the adjudicator has done his or her honest best in performing his or her role as an adjudicator, even if ultimately the decision is unenforceable. The position might well be different if there was to be any suggestion of dishonesty, fraud or bad faith …”

Harrington appealed, arguing that the adjudicator had failed to perform the service which he had contracted to perform. The CA did agree that the Scheme imposes an obligation on the adjudicator to produce a decision within a short period. It also agreed that the adjudicator was obliged to perform some ancillary functions and entitled to perform others. He could not simply produce a decision out of the hat. However the question was not whether the adjudicator was obliged or entitled to take these steps. Rather it was whether he was entitled to be paid for those steps, if they led to an unenforceable decision. Here, the adjudicator’s terms of engagement had to be read together with the Scheme. The Scheme carefully defines the circumstances in which the adjudicator is entitled to be paid. For example, the purpose of paragraph 25 of the Scheme is to make it clear that an adjudicator cannot charge an unreasonably high fee. Lord Dyson noted:

“I return to the question: what was the bargained-for performance? In my view, it was an enforceable decision. There is nothing in the contract to indicate that the parties agreed that they would pay for an unenforceable decision or that they would pay for the services performed by the adjudicator which were preparatory to the making of an unenforceable decision. The purpose of the appointment was to produce an enforceable decision which, for the time being, would resolve the dispute.”

A decision that was unenforceable was of no value. The parties would have to start again in order to achieve the enforceable decision which the adjudicator had contracted to produce. If the adjudicator’s appointment was revoked due to his default or misconduct, he is not entitled to any fees:

“the making of a decision which is unenforceable by reason of a breach of the rules of natural justice is a ‘default’ or ‘misconduct’ on the part of the adjudicator. It is a serious failure to conduct the adjudication in a lawful manner.”

The CA considered the difference between arbitrators and adjudicators. First, an arbitral award is binding, subject to the supervisory jurisdiction of the court under sections 66-68 of the Arbitration Act 1996. Second, when ancillary functions are carried out by an arbitrator, they are binding and therefore the arbitrator gives value in performing them. Third, an arbitrator has inherent jurisdiction to make a binding decision on the scope of his own jurisdiction. Finally, the CA considered the policy question:

“I accept that the statutory provisions for adjudication reflect a Parliamentary intention to provide a scheme for a rough and ready temporary resolution of construction disputes. That is why the courts will enforce decisions, even where they can be shown to be wrong on the facts or in law. An erroneous decision is nevertheless an enforceable decision within the meaning of the 1996 Act and the Scheme. But a decision which is unenforceable because the adjudicator had no jurisdiction to make it or because it was made in breach of the rules of natural justice is quite another matter.”

Such a decision does not further the statutory policy of encouraging the parties to a construction contract to refer their disputes for temporary resolution. It has the opposite effect. It causes the parties to incur cost and suffer delay. The CA stressed that what mattered was what the contractual arrangements between the parties actually said. Here, the adjudicator had not produced an (enforceable) decision which determined the matters in dispute. This was what his contract had required of him before his entitlement to fees arose. Finally, the CA noted that if their decision did give rise to concerns on the part of adjudicators then the solution was:

“in the market-place: to incorporate into their Terms of Engagement (if the parties to the adjudication are prepared to agree) a provision covering payment of their fees and expenses in the event of a decision not being delivered or proving to be unenforceable.”

Adjudication: stay of enforcement proceedings
FG Skerritt Ltd v Caledonian Building Systems Ltd

Caledonian engaged FGS as a subcontractor. The contract was based on the DOM2 standard form with a contract price of over £1.8 million. FGS submitted an invoice for the outstanding balance of the subcontract sum, less half the retention. This was on the basis that practical completion had been achieved. Caledonian did not accept that practical completion had been achieved and did not pay that invoice. FGS went into administrative receivership.

The administrative receivers sold FGS’s book debts to Nathu Ram Puri Environmental Design Consultants (“EDC”). The sale to EDC was ineffective in assigning FGS’s book debt because the DOM2 conditions included a prohibition on assignment. EDC was not therefore the owner of the relevant debt. The legal position was that the assignment took effect by way of a trust, so that FGS held the debt on trust for EDC.

FGS had ceased work on the project in 2010 following the administrative receivership, but then submitted an invoice for the remaining half of the retention, 12 months after it contended practical completion had been achieved. The administrative receivers ceased to act as such on 14 March 2011. FGS was not wound up but did not trade. It had not yet been struck off the register of companies. FGS issued a notice of adjudication and was awarded £184k (plus VAT).

As a result Caledonian’s counterclaim relating to costs incurred in completing the subcontract works and rectifying defects as a consequence of FGS’s administrative receivership could not be set off against the invoiced sums. FGS issued proceedings seeking to enforce the adjudicator’s award, FGS’s parent company, Melham Group Ltd (“MGL”) having offered a guarantee.

Mr Justice Ramsey also referred to the Wimbledon v Vago case and noted that if a claimant is insolvent then a stay of execution will usually be granted. However, if the party who has to pay has no real grounds for challenging the adjudicator’s decision, then even if the party is insolvent a stay would not be appropriate because it would deprive creditors of the opportunity of making some recovery from the insolvent company. Here, whilst there was no challenge to the correctness of the adjudicator’s decision in relation to the sums due on the two invoices, there was a challenge by way of defence of equitable set-off both for the sums already expended in remedying defects in FGS’ s work at HM Prison Eastwood Park and also arguable claims for future remedial work to those works. These raised real grounds of equitable set-off amounting to a sum exceeding the sum awarded by the adjudicator.

In considering the terms of the guarantee that was offered, the Judge had to consider the obligation of a party to disclose confidential financial information to another party so that that other party can consider whether to apply for a stay. He said that there was no general obligation for a party to provide confidential financial information to another party in order to allow that other party to investigate the solvency, so as to seek to establish that the judgment should be stayed. However:

“when as here, a party is seeking to avoid a stay where it has been shown to be insolvent and where it is proffering a bank guarantee to avoid the stay, the position is quite different. Where it is proffering a guarantee it is only appropriate that it provides the necessary current financial information of the company proffering the guarantee so that the Court and the other party can properly assess the worth of that guarantee.“

The fact that the money is held in trust by FGS for EDC and therefore has to be paid to EDC did not affect the general principle that an adjudicator’s decision is temporarily binding and should be enforced. In general there was no requirement for a party to show or establish that the money was to be used in one way or another, in order to obtain enforcement of an adjudicator’s decision. Therefore the Judge ordered that there should be summary judgment based on the sums in the adjudicator’s decision but that that judgment should be stayed pending the production of a satisfactory guarantee.

Adjudication: set-off against an adjudicator’s decision
Thameside Construction Co Ltd v Mr & Mrs Stevens

Mr and Mrs Stevens employed Thameside to carry out extensive construction works at their home. Thameside served a Notice of Adjudication claiming that a dispute had arisen “following the Employer’s failure to pay amounts due” and seeking “a peremptory Decision from the Adjudicator”. The Notice sought £190k and that Mr and Mrs Stevens should pay such sum “without set-off”. Mr and Mrs Stevens’ Response noted that the adjudicator had not been asked to determine the question of practical completion and so this fell outside of his jurisdiction. They also asserted that a final certificate could not be issued due to quality and other issues and raised a counterclaim, £88k for defects and £60k for liquidated damages, which they said they were entitled to set-off against any sum decided to be due to Thameside. Thameside said that no counterclaim could be raised as there was no withholding notice.

The Adjudicator awarded Thameside £88k and specifically on one of the supporting schedules put the figure of £0.00 against the LDs. Six days later the Contract Administrator issued an Interim Payment certificate, certifying a net sum due for payment of £88k. On the same day, Mr and Mrs Stevens wrote to Thameside purporting to give a withholding notice stating that it was their intention to withhold payment of £40k in relation to liquidated damages. They paid the balance. In the enforcement proceedings, Mr and Mrs Stevens said that the decision could be and was to be treated in effect as equivalent to an interim certificate and they were therefore entitled to set-off or withhold against the sum payable pursuant to the decision provided that the withholding was done in accordance with the contract between the parties. Having reviewed the previous cases, Mr Justice Akenhead set out the following “broad conclusions” on the issues arising where a party seeks to set-off against or withhold from sums which an adjudicator has said are to be paid:

“(a) The first exercise should be to interpret or construe what the adjudicator has decided. In that context, one can look at the dispute as it was referred to him or her. That can involve looking at the Notice of Adjudication, the Referral Notice, the Response and other ‘pleading’ type documents. One can have regard to the underlying construction contract. Primarily, one needs to look at the decision itself.

(b) In looking at what the adjudicator decided, one can distinguish between the decisive and directive parts of the decision on the one hand and the reasoning on the other, although the decisive and directive parts need to be construed to include other findings which form an essential component of or basis for the decision (see Hyder).

(c) The general position is that adjudicators’ decisions which direct that one or other party is to pay money are to be honoured and that no set-off or withholding against payment of that amount should be permitted.

(d) There are limited exceptions. If there is a specified contractual right to set-off which does not offend against the statutory requirement for immediate enforcement of an adjudicator’s decision, that is an exception albeit that it will be a relatively rare one. Where an adjudicator is simply declaring that an overall amount is due or is due for certification, rather than directing that a balance should actually be paid, it may well be that a legitimate set-off or withholding may be justified when that amount falls due for payment or certification in the future. (See Squibb).

(e) Where otherwise it can be determined from the adjudicator’s decision that the adjudicator is permitting a further set-off to be made against the sum otherwise decided as payable, that may well be sufficient to allow the set-off to be made (see Balfour Beatty).“

Here, if you just looked at the wording used by the adjudicator, there could be no doubt that there would be no right of set-off or withholding. The adjudicator directed that payment should be made within 14 days and made it clear that he had allowed nothing for liquidated damages and that there should be no set-off albeit that Mr and Mrs Stevens were entitled to set-off the specific sums already allowed to them in the adjudicator’s calculations. However, some confusion arose because the adjudicator formed the view that issues as to the date of practical completion, extension of time and liquidated damages should be left over “to another day”. This provisional view was set out in a footnote, which was described by the Judge as being in the nature of an obiter type of finding, albeit it was clearly not part of the decision.

The Judge was of the view that, in deferring this issue “to another day”, the adjudicator had fallen into error. The issue of liquidated damages was part of the dispute which he was required to resolve because it was raised at least as a defence by way of set-off to the disputed claim put before him. Although Mr and Mrs Stevens had stated that “the question of whether practical completion was achieved” fell outside his jurisdiction, what did not fall outside his jurisdiction was the question of whether there was any entitlement to liquidated damages, something which involved considering issues related to the question of when practical completion was achieved. Of course, Mr and Mrs Stevens actually paid out over half of what the adjudicator ordered and in that sense had accepted that he had jurisdiction. This was why they argued that the adjudicator was treating his decision as if it were an interim certificate and hence he must be taken to have envisaged that there could be a later set-off against his decision.

Adjudication - residential occupiers
Westfields Construction Ltd v Lewis

Lewis resisted the enforcement of an adjudicator’s decision on the grounds that the construction contract was in respect of a house which, at the time of the contract, Lewis contended he occupied as his residence and intended to occupy in the future. In other words, Lewis relied on the exception at section 106 of the HGCRA. Westfields said that Lewis did not occupy the property at the time the contract was made and/or that his intention was always that the property would be refurbished so that it could be let for commercial purposes. Therefore the residential occupier exception did not apply.

One issue for Mr Justice Coulson was at what point should the court assess whether or not the employer occupies the property as his residence? Is it the date of the formation of the contract? Or is it, as was suggested, important to regard occupation as a continuing operation, and not to over-emphasise the snapshot position at the date of the contract? The Judge was of the view that “occupation” was an ongoing process which could not be tested by reference to a single snapshot in time. “Occupies” must carry with it some reflection of the future: it indicates that the employer occupies and will remain at (or intends to return to) the property. Therefore the evidence about the position at the date that the contract was made had to be considered in the context of all of the evidence of occupation and intention, both before and after the agreement of the contract.

Above all, section 106 needed to be approached with common sense: it ought to be plain, on a brief consideration of the facts, whether the employer is or is not a residential occupier within the terms of the exception. Here, on the facts, the Judge considered that Lewis intended to rent out the property, which meant that he could show that he intended to occupy the property as his residence.

The case was interesting for the comments made by the Judge about the residential occupier exclusion. The Judge noted that section 106 was intended to protect ordinary householders, who were not otherwise concerned with property or construction work, and were without the resources of even relatively small contractors, from what was, in 1996, a new and untried system of dispute resolution. It was felt that what might be the swift and occasionally arbitrary process should not apply to a domestic householder. Hence, the Judge concluded his judgment by asking whether it was time for section 106, and indeed the other exceptions to statutory adjudication, to be done away with, so that all parties to a construction contract “can enjoy the benefits of adjudication”.

Other cases
Construction Industry Law Letter

Serious irregularity - ss 68 and 69 Arbitration Act 1996

Atkins Ltd v The Secretary of State for Transport

Technology and Construction Court; before Mr Justice Akenhead; judgment delivered
1 February 2013

The facts

Under an amended NEC3 contract dated 26 February 2008, Atkins was employed by the Secretary of State for Transport (“the Authority”) to act as managing agent and contractor for Area 6 of the highways network for a period of 5 years. Area 6 covered Cambridgeshire, Essex, Hertfordshire, Norfolk and Suffolk. Under the Contract Atkins was required to maintain the roads in Area 6 and carry out both routine and cyclical maintenance. Atkins was required to rectify defects and Annex 2.1.1 to the Contract included potholes in a non-exhaustive list of Category 1 defects that would require prompt attention.

Clauses 60-65 provided for compensation events entitling Atkins to claim additional monies over and above what the Contract otherwise allowed for. Under cl. 60.1(11) Atkins could claim compensation for a defect that: (i) had not been revealed by the information previously available; (ii) that was not evident from a visual inspection or routine survey; (iii) that could not reasonably have been discovered prior to the Contract date; and, (iv) that “… an experienced contractor or consultant would have judged at the Contract Date to have such a small chance of being present that it would have been unreasonable for him to have allowed for it.”

Clause 90.1 provided for disputes to be referred to adjudication and that if a party was dissatisfied with the Adjudicator’s decision it could refer the dispute to arbitration.

A dispute arose between the parties regarding payment for works to remedy potholes. Atkins claimed that the prevalence of potholes on the network was significantly greater than anticipated and that it was therefore entitled to payment as a compensation event under cl. 60.1(11). On 3 February 2012 Atkins referred the dispute to adjudication. The parties agreed that the Adjudicator was to determine in principle the issue as to whether, assuming the facts were established, there was a compensation event. In his decision issued on 9 March 2012 the Adjudicator rejected two of the arguments put forward by Atkins but accepted the third, finding that potholes occurring after the date of the Contract were defects within clause 60.1(11) if they exceeded in volume the number of potholes that it would have been reasonable for an experienced contractor to have allowed for.

On 4 April 2012 the Authority commenced arbitration in order to challenge the Adjudicator’s findings in favour of Atkins. The Authority submitted that the Contract provided no threshold or limit on the number of potholes Atkins might be required to repair and that Atkins’ construction of cl. 60.1(11) which treated “defect” as meaning “volume of defects” made no commercial sense.

The nub of Atkins’ case was that “a defect” could mean a pothole and that subject to meeting the first three criteria in cl. 60.1(11), point (iv) would be satisfied if the potholes claimed for would not have been allowed for by an experienced contractor because there was such a small chance of such an excessive number of potholes occurring.

On 22 November 2012 the Arbitrator issued an Interim Award finding that an excess volume of potholes was not capable of constituting a defect and therefore was not a compensation event. On 19 December 2012 Atkins wrote to the Arbitrator stating that there had or may have been a “serious irregularity” within the meaning of s.68 of the Arbitration Act 1996 (“the 1996 Act”).

On the same day Atkins commenced proceedings to challenge the Arbitrator’s Interim Award under s.68 of the 1996 Act. Atkins contended that where the Arbitrator had failed to understand the claim they had formulated and had consequently failed to deal with it, then under s.68(2)(d) of the 1996 Act this amounted to a serious irregularity that had or would cause substantial injustice. In the alternative Atkins sought permission to appeal on a point of law under s.69(3) of the 1996 Act.

Issues and findings

What approach should the Court take when determining whether or not there was a serious irregularity in an arbitration award?

The correct approach was to consider the reasoning and the overall conclusion reached to see whether in reality there was a serious irregularity. The Court was not required to engage upon a hypercritical or excessively syntactical analysis of an award.

Had there been a serious irregularity?

No. It was impossible to say that there had been any, let alone a serious irregularity in circumstances where the words used by the Arbitrator confirmed that he knew the issue, had analysed the relevant wording of cl. 60, reviewed the commercial context and produced the decision that he did.

Had there been substantial injustice?

No. The Arbitrator was not wrong in his overall reasoning and his conclusion as to the meaning of cl. 60.1(11). It followed that there could be no substantial injustice even if a serious irregularity was established.

Should permission to appeal be granted?

No. The point to be appealed, i.e. the proper meaning of cl. 60.1(11), had already been determined by the Court when considering Atkins’ application. Permission would have been refused in any event where on balance the Arbitrator’s decision was not obviously wrong or open to serious doubt within the meaning of s.69(3)(c) of the 1996 Act.

Commentary

The principal issue raised in this case was whether or not Atkins could satisfy the requirements of sections 68 and 69 of the 1996 Act in order to challenge the Arbitrator’s award. For the purposes of considering these applications the Judge found it necessary to look at the issue of contractual interpretation raised in the adjudication and the arbitration, i.e. the proper meaning of cl. 60.1(11). Strictly speaking then, the Judge’s comments upon this aspect of the NEC3 Form are obiter. Even so, as the Judge noted in paragraph 9 of the judgment, very few cases involving disputes as to the interpretation of the NEC3 Conditions have featured in reported Court decisions so the analysis of cl. 60 will be of interest to practitioners.

The Judge agreed with the submissions of the Authority to the effect that if cl. 60.1(11) was to be interpreted in the manner contended for by Atkins then it would have converted what was a lump sum contract into a re-measurement arrangement. The Judge concluded that if this interpretation was correct then Atkins would have been in a “win/win” situation because they could have kept the whole of the lump sum if the number of potholes was less than they reasonably anticipated but would be compensated if there were more potholes than they had expected. Commercial common sense therefore supported a construction whereby each party took commercial risks.

The Judge also took into account the practical side effect that if every pothole encountered across the road network within Area 6 amounted to a compensation event, then possibly thousands of notices would have to be given under the Contract, with each one including a quotation.

The Judge stated that when considering whether an Arbitrator’s award contains serious irregularities the Court should not undertake a hypercritical or excessively syntactical analysis of the award. Rather the Court should focus on the reasoning and conclusions. The Judge was clear that parties should not try to dress up a simple error as a serious irregularity in order to try and convince a Court to interfere with an Arbitrator’s award.

Finally, on the permission to appeal point it is worth noting that the Judge concluded that the proper interpretation of cl. 61.1(11) did raise a question of general public importance in accordance with s.69(3)(c)(ii) of the 1996 Act. The Judge observed that this criterion would have been satisfied where the NEC3 Standard Form is widely used and where potholes in roads are an increasingly widespread problem in times of economic downturn, Government spending cuts and changing weather patterns.

Audit clauses - reasonable requests for documents
Transport for Greater Manchester v Thales Transport & Security Ltd

Technology and Construction Court; before Mr Justice Akenhead; judgment delivered
21 December 2012

The facts

During October 2008 Transport for Greater Manchester (“TGM”) engaged Thales under a contract (“the Contract”) to supply a new tram operating system. The original Contract sum was for £22 million. The Contract contained provisions entitling TGM and others to carry out a detailed and wide ranging audit of Thales’ documents with the purpose of verifying Thales’ compliance with its contractual obligations. Under cl. 27, Thales was required for a period of at least 12 years to maintain in a form suitable for inspection all records relating to the performance of its obligations under the Contract (“the Records”).

Clause 28.1 additionally provided that upon a reasonable request, Thales was to provide other information, records or documents in its possession or control, or in the possession or control of its auditors, agents or subcontractors, that related to the Records (“the Related Information”). Clause 28.2 provided that on giving reasonable notice, TGM, amongst others, would be entitled to inspect and make copies of the Records, the Related Information or any other documents in Thales’ possession or control which related to the carrying out of any of Thales’ obligations under the Contract.

The Contract works were delayed and during September and October 2012 Thales submitted claims for significant increased costs and an extension of time. Starting in July 2012, TGM submitted various requests to Thales for information regarding the claims. TGM stated that they wanted to inspect these documents in order to assess the claims. Thales did not provide any of the information requested.

During November 2012 TGM commenced Part 8 proceedings seeking an order for specific performance requiring Thales to disclose all of the categories of documents requested. Before the hearing Thales conceded that it would disclose some of the documents requested but the Court was left to consider TGM’s entitlement to inspect documents in a dozen or so categories. Thales raised a number of objections including that:

(i) the references to documents which “related” to performance or carrying out of obligations were limited so that cost records were generally excluded;
(ii) TGM’s requests lacked clarity and so specific performance should not be ordered;
(iii) requests for certain cost-related documents were too broad or imprecise;
(iv) commercially sensitive documents should not be disclosable, nor should documents relating to employment records as their disclosure might offend the Data Protection Act; and,
(v) some of the documents requested were privileged.

TGM argued for a broad definition of the Contract and asserted that each of the categories of documents requested were disclosable under clauses 27 and 28.

Issues and findings

Was TGM entitled to an order for specific performance?

Yes, in relation to the majority of the categories of documents requested. TGM had established that the documents had been requested in order to verify Thales’ compliance with its obligations under the Contract. Clauses 27 and 28 encompassed the provision not only of source or basic records relating to Thales’ performance and supply but also of other documents which related in a broad sense to performance and supply.

Commentary

It was common ground that the test here for disclosability was a matter of contract and the Judge’s conclusions turned upon the proper construction of clauses 27 and 28. Whilst the Judge found that the requests for documents or information had to be reasonable, so that if they were not, Thales did not have to comply, he concluded that most of the categories of documents sought by TGM’s requests were reasonable and in compliance with the terms of the Contract which were to be broadly interpreted. In particular the Judge noted the frequent use of the words “related to” in clauses 27 and 28 and found that these general words did not suggest that the requests for documents were to be limited.

Therefore, Thales was ordered to provide access to a wide range of information including commercially sensitive documents, documents containing confidential information or personal data and company board minutes. Unusually for a construction contract, the relief ordered was specific performance rather than disclosure in accordance with CPR Part 31. The range of documents that are to be disclosed under an audit clause may be wider or narrower than that required under CPR Part 31, and unless expressly catered for in the clause, issues of proportionality should not arise. The scope of a contractual audit clause will always depend upon the precise wording. As with any contractual term, an audit clause that is not clearly worded may be more difficult to enforce.

The judgment also briefly touches upon the issue of litigation privilege. Thales argued that some of the reports identified in TGM’s requests had been prepared for their legal department with the dominant purpose of gathering information for use in contemplated adjudication and/or litigation. The Judge declined to make a decision on the evidence before him and allowed Thales an opportunity to submit further witness evidence to enable the Court to form a view as to the dominant purpose of the reports and other issues relating to privilege.

Primary and secondary obligations - whether instrument comprised on-demand bond
Wuhan Guoyu Logistics Group Co Ltd and another v Emporiki Bank of Greece SA

Court of Appeal (Civil Division); before Lord Justice Longmore, Lord Justice Rimer and Lord Justice Tomlinson; judgment delivered 7 December 2012

The facts

Wuhan Guoyu Logistics Group Co Ltd and Yangzhou Guoyu Shipbuilding Co Ltd (“the Sellers”) jointly operated a shipbuilding company in Yangzhou, China. On 29 November 2006 the Sellers entered into two contracts with Swissmarine Inc of Liberia for the construction of two 57,000 DWT bulk carriers known as Hull GY402 and Hull GY404. During November 2007 the contracts were novated to Kantara Navigation Limited and Tamassos Navigation Limited (“the Buyer”), respectively. The price for Hull GY404 was to be US$41,250,000 payable in five instalments. Under Article 3(b) of the contract for Hull GY404 (“the Shipbuilding Contract”) the second instalment of US$10,312,500 was payable following the provision by the Sellers of a Refund Guarantee and the Buyer’s receipt of notification from the Sellers that the first 300m of steel plate had been cut, as confirmed and approved by the Buyer’s representative.

The Shipbuilding Contract also required the Buyer to arrange an irrevocable letter of guarantee in a prescribed form to cover payment of the second instalment. In compliance with this requirement, on 14 December 2007 Emporiki Bank of Greece (“the Bank”) issued a guarantee (“the Letter of Guarantee”) to the Sellers. The Letter of Guarantee included wording to the effect that the Bank irrevocably, absolutely and unconditionally guaranteed as the primary obligor and not merely as the surety, the due and punctual payment by the Buyer of the second instalment. The Letter of Guarantee also provided that the Bank would pay the second instalment plus interest upon receipt by the Bank of the Sellers’ written demand stating that the Buyer had failed to pay for a period of 20 days after the second instalment fell due.

The Sellers claimed that the first cutting of the steel took place on 18 April 2009 but the Buyer disputed this as its representative had not been present. On 29 April 2009 the Bank received a Refund Guarantee but this was not in the form prescribed by the Shipbuilding Contract. Following further exchanges the Sellers agreed to issue a revised version but did not do so. On 11 May 2009 the Sellers issued an invoice for the second instalment together with a certificate to the effect that the steel cutting for Hull GY404 had been carried out on 18 April 2009 at the Sellers’ shipyard. The certificate had been signed by the Sellers and by a Bureau Veritas surveyor but not by the Buyer as again, its representative had not been present.

The Buyer’s position was that the second instalment had not fallen due because the criteria in the Shipbuilding Contract had not been satisfied where: (i) it was not clear that 300 m of steel plate had in fact been cut; (ii) that the steel cutting had not in any event been approved by its representative; and (iii) the Refund Guarantee provided by the Sellers was not in the form prescribed by the Shipbuilding Contract. The Buyer and the Sellers subsequently commenced arbitration proceedings in relation to these and other disputes under the Shipbuilding Contract.

On 22 June 2011 the Sellers submitted a demand for payment to the Bank. The Bank did not pay and in 2012 the Sellers issued an application for summary judgment contending that the Letter of Guarantee was in the nature of an on-demand bond so that payment was due upon a receipt of their written demand, irrespective of the contractual position between the Buyer and the Sellers. The Bank contended that the Letter of Guarantee was in the nature of a true guarantee so that its liability was contingent on resolution of the dispute raised by the Buyer over whether the second instalment was actually payable in accordance with the terms of the Shipbuilding Contract.

At first instance, Mr Justice Christopher Clarke found that whilst some of the wording suggested primary obligations, the Letter of Guarantee also included the classic language of a guarantee, so that when looked at as a whole, it could not be regarded as an on-demand instrument. The Sellers appealed.

Issues and findings

Was the Letter of Guarantee a true guarantee that gave rise to contingent obligations only?

No. Where, as in this case, the document related to an underlying transaction between parties in different jurisdictions, had been issued by a bank, contained an undertaking to pay “on demand” and did not include any provisions excluding or limiting the defences available to the guarantor, the presumption should be that it was an on-demand instrument.

Commentary

Longmore LJ delivered the leading judgment in the Court of Appeal and began by confessing to facing some difficulty where the Letter of Guarantee included wording that pointed towards an on-demand obligation but also wording that pointed towards a guarantee. He made it clear that the Court would not adopt an approach based upon comparing the number of “pointers” in a document which suggested an on-demand obligation with those that suggested a guarantee, with the higher number prevailing.

Longmore LJ reiterated the principle that where certain phrases appear, they may give rise to a presumption as to the proper meaning of the document. Applying this principle, Longmore LJ placed considerable reliance upon the guidance set out in Paget’s Law of Banking to the effect that where an instrument: (i) relates to an underlying transaction between parties in different jurisdictions; (ii) is issued by a bank; (iii) contains an undertaking to pay “on demand” (with or without the words “first” and/or “written”); and, (iv) does not contain any provisions excluding or limiting the defences available to a guarantor, then there is a presumption that the instrument should be construed as creating on-demand obligations.

Longmore LJ considered that at first instance, the Judge had construed the Letter of Guarantee in isolation and fallen into error by not giving enough weight to the presumption described in Paget and the relevant authorities that supported it. It seems clear that Longmore LJ was aiming to achieve a degree of consistency in the approach to be adopted by the Court when faced with disputes over whether or not an instrument is on-demand or a guarantee. As it is, the Court of Appeal’s judgment should be of some comfort to those claimants who can satisfy all or most of the criteria giving rise to the presumption described in Paget but it remains difficult to set out a definitive list of factors which determine whether an instrument is a true guarantee or is on-demand.

Longmore LJ noted that in most disputes over the meaning of guarantees the Court will be called upon to consider numerous previous authorities in order to determine how near or how far the document in question differs from documents construed in past cases. Absent clear wording and a willingness to dispense with some of the archaic phrases that still appear in guarantees, it seems likely that disputes based upon competing authorities will still end up in Court, with this judgment now added to the pick and mix selection of decisions from which parties may seek to fashion arguments on interpretation.

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